Monday, July 02, 2012

Quick thought: Libor - the perfect fix up

This is the icing on the cake, the perfect example of how the system never was the capitalist, free market institute that was purported. We were sold down the river, all of us. It was a rigged game from the outset, a system where the market was hijacked and twisted by the vested interests, vested interests that continue to benefit from the fall out and will continue to do so for years to come. Resources have been misallocated at an almost inconceivable level. It will run for years to come, nay for decades. The LIBOR scandal that is unfolding is a dark and yet almost beautifully perfect example of the forces of evil that landed us in this mess. While the dust hasn't yet settled, it does indeed look like a fraud took place, whether it be explicitly criminal, conducted through nods and winks or just the way the players in the market did their business. Why is the LIBOR story so important? If interest rates represent the price of money, then LIBOR is the very heart of the beast. It is price (interest rate) upon which hundreds of billions, possibly trillions of pounds of financial contracts are based. These range from complex derivatives to simple mortgages and savings rates. Simply put, the price was not what it should have been. It was not a fair price. The rate was fixed to suit the interests of the players, who were incentivised to twist it in their favour. And it was possible because the market was not transparent and there were insufficient players to ensure a true price. We must not think this is the result of unrestricted or unfettered capitalism. It is not. What it is is a consequence of the absence of forces that enable capitalism to work effectively. Conditions were created that allowed for a rigged game to be played at the expense of the public. The scandal succintly highlights how we can be taken for suckers if we choose to keep our eyes closed and blindly trust the system. There is no great architect. But there are dark corners were the free market cannot shine its light. We must either we find a better torch or tear down the strucure and start afresh. Without the light you can't see what's going on. And bad things hide in dark places.

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